Insurance-LinkedSecuritiesQ1 2018 Update

Aon Benfield

2 Insurance-Linked Securities: Q1 2018 Update

Aon Benfield 1

Executive Summary

The first quarter of 2018 was marked by record issuance volumes, new entrants to the market, and strong support from investors. The $3.58 billion of catastrophe bonds placed represented the highest ever first quarter issuance tally, and far exceeded the 2016 and 2017 first quarter issuance volumes, which were each approximately $2.2 billion.

As the Insurance-Linked Securities (“ILS”) market digested the implications from 2017 loss-causing events, catastrophe bonds continued to demonstrate value both to sponsors and investors alike, and there remained strong demand for issuance on both sides. Maturities for the quarter totalled $1.37 billion of property catastrophe bonds – which was not only easily replaced, but also significantly expanded, bringing the market to a new high of $29.0 billion of catastrophe bonds on-risk as at March 31, 2018, of which $27.3 billion were property transactions. In short, in Q1 the market remained strong, and we feel this

momentum will carry into the second quarter and beyond.

Exhibit 1: Catastrophe Bond Issuance by Quarter

Source: Aon Securities Inc.

0

2000

4000

6000

8000

10000

12000

201820172016201520142013201220112010

Q2 Q3 Q4Q1

1,877

2,393

1,990

854

742

1,015670

232

2,350

300

2,075

1,888

1,877

1,621

3,303

670

804

2,095

1,493

2,075

2,075

250

4,492

1,410

1,525

650

2,962

1,694

1,850

1,353

780

6,378

3,5802,170

925

800

2,215

USD

Mill

ion

s

2 Insurance-Linked Securities: Q1 2018 Update

First Quarter 2018 Catastrophe Bond Transaction Review

Table 1: First Quarter 2018 Catastrophe Bond Issuance

Beneficiary Transaction Size (million) Covered Perils Trigger Rating Expected Loss

Risk Interest Spread

First Quarter 2018

Aetna Life Insurance Company

Vitality Re IX Ltd 2018-1 Class A $140.0 MBR Indemnity BBB+ (S&P) 0.01% 1.60%

Vitality Re IX Ltd 2018-1 Class B $60.0 MBR Indemnity BB+ (S&P) 0.16% 1.75%

Republic of Chile IBRD CAR 116 $500.0 Chile EQ

Parametric

Not Rated 0.86% 2.50%

Republic of Columbia IBRD CAR 117 $400.0 Columbia EQ Not Rated 1.56% 3.00%

The Fund for Natural Disasters

IBRD CAR 118 $160.0 Mexico EQ Not Rated 0.79% 2.50%

IBRD CAR 119 $100.0 Mexico EQ Not Rated 6.54% 8.25%

Republic of Peru IBRD CAR 120 $200.0 Peru EQ Not Rated 5.00% 6.00%

ZenkyorenNakama Re 2018-1 Class 1 $500.0

JP EQ IndemnityNot Rated 0.48% 2.00%

Nakama Re 2018-2 Class 2 $200.0 Not Rated 1.44% 3.00%

Tokio Marine & Nichido Fire Insurance Co

Kizuna Re II Ltd Class A $150.0 JP EQ

Indemnity

Not Rated 0.12% 1.88%

Kizuna Re II Ltd Class B $50.0 JP EQ Not Rated 0.99% 2.50%

MS&AD Insurance Group Holdings

Akibare Re Ltd 2018-1 Class A $220.0 JP TY, EQ,

FLD, EQFF Indemnity Not Rated 0.73% 1.90%

Akibare Re Ltd 2018-

1 Class B$100.0

JP TY, EQ, FLD, EQFF

Indemnity Not Rated 0.99% 1.90%

State Farm Fire and Casualty Company

Merna Re Ltd 2018-1 Class A $300.0US (New

Madrid) EQIndemnity Not Rated 0.52% 2.00%

Allstate Insurance Company

Sanders Re Ltd 2018-1 Class A

$500.0US, NS, EQ,

SW, FI, OTIndemnity Not Rated 0.71% 5.50%

• In January, health insurer Aetna returned to the life ILS marketwith its ninth Vitality Re deal, issued by a new Cayman Islands-based vehicle. The $140 million Class A and $60 million ClassB notes provided Aetna with cover against medical benefitclaims, on the basis of an attachment medical benefit ratio of100 percent and 94 percent respectively. Tranche A presentedan expected loss of less than 0.01 percent and priced at 1.6percent, below the starting guidance of 1.75 percent to 2.25percent. Tranche B launched with an expected loss of 0.16percent and priced at 1.75 percent, the midpoint of the initialguidance range of 2 percent to 2.75 percent.

• In February, the IBRD returned to the market with a landmarktransaction providing earthquake coverage to Chile, Colombia,Peru and FONDEN/AGROASEMEX in Mexico. The transactionwas the largest parametric earthquake transaction in the historyof the ILS market and the second largest ILS deal ever, witha total size of $1.36 billion across all covered countries. TheIBRD issued as five separate classes of notes (two for Mexicoand one Chile, Colombia, and Peru) which were well receivedby investors, with pricing consistently settling at the bottomof reduced price guidance. This demonstrated the continuedappeal of parametric transactions covering diversifying perils,and solidified the IBRD’s position as a major cedant in the market.

Repeat sponsors led Q1 in terms of issuance volume, with $2.28

billion in property catastrophe issuance, which alone exceeded

the total first quarter 2017 issuance. Further, the market

expanded into a previously unrepresented region in ILS – Latin

America – through the International Bank for Reconstruction

and Development (“IBRD ”) CAR program issuances. Investor

appetite remained healthy, as reflected in spread compression

along with the repeated upsizing of transactions from initial

guidance.

Below we provide an overview of the transactions coming to

market during the quarter.

Aon Benfield 3

• In March, regular market participant Zenkyoren returned with

Nakama Re Ltd. 2018-1, providing three-year aggregate

coverage against Japanese earthquake, with perils also

including tsunami, fire, sprinkler-related water damage, flood

and earthquake-induced shaking. The deal was offered in

two tranches, A and B, which were significantly upsized from

their original offering of $200 million and $50 million, to $500

million and $200 million respectively. The transaction was well

received and the tranches both priced at the bottom range of

their respective price guidance – at 2 percent and 3 percent for

expected losses of 0.48 percent and 1.44 percent respectively.

• Also in March, the fourth Akibare Re catastrophe bond was

offered to the market. Whereas previous Akibare transactions

had covered Mitsui Sumitomo Insurance, the Series 2018-1

also provided protection to Aioi Nissay Dowa Insuance Co.

This was an indemnity transaction, structured in two tranches,

with each tranche providing cover to one of the ceding

companies against losses from typhoons, floods and earthquake-

related fire events across Japan. Once again, the deal

encountered strong investor demand and the tranches both

priced at 1.9 percent, at the bottom of an already reduced

price guidance, with expected losses of 0.73 percent and

0.99 percent respectively. The transaction was also upsized

from $150 million to $320 million.

• Tokio Marine and Nichido Fire returned to the market with

its third Kizuna Re II Ltd. catastrophe bond, providing

$200 million of collateralised reinsurance protection against

Japanese earthquake events. The transaction featured a

term-aggregate indemnity trigger, meaning that losses in

excess of the deductible would accumulate over each of the

three-year risk periods, overlapping with the five-year total

term of the transaction. Risk interest spreads were set at 1.875

percent from a range of 1.75 percent to 2 percent for Class A,

with a three-year expected loss of 0.35 percent (0.12 percent

annualized); and 2.5 percent from a range of 2.5 percent to

3 percent for Class B, which featured a riskier 2.98 percent

three-year expected loss (1 percent annualized).

•

Allstate returned to the ILS market with Sanders Re Ltd. 2018-1, which provided per occurrence and annual aggregate

protection on an indemnity basis to Allstate’s personal

property and auto business. The issuance covered losses

arising from all property risks affecting the District of

Columbia and 48 states of the U.S. (excluding Florida and

initially New Jersey). The coverage terms were among the

broadest in the catastrophe bond market, covering not only

peak perils (i.e. named storm and earthquake) but also severe

weather, fires and other perils, which was consistent with a

traditional placement and represented one of the broadest in

the ILS market. The transaction included a unique structural

feature, with coverage being both on a per-occurrence and

annual aggregate basis, in two separate sections of a single

class of notes. The transaction priced at 5.5 percent and the

transaction was upsized from $400 million to $500 million.

•

The Merna Re Ltd. Series 2018-1 transaction on behalfof State Farm Fire and Casualty Company (“State Farm”) was

the fourth catastrophe bond transaction from the Merna Re

Ltd. program and the seventh overall on behalf of State Farm

to exclusively cover New Madrid Earthquake exposure. The

single class of notes provided $300 million of collateralized

protection on an indemnity per occurrence basis for losses

arising from earthquakes (including fire following), similar

to the recent Merna Re Ltd. issuances. The transaction priced

at 2.00%, consistent with the initial risk interest spread of

the Series 2017-1 Notes.

1 Expected loss represents initial one-year annualized figures with WSST sensitivity when applicable

Source: Aon Securities Inc.

4 Insurance-Linked Securities: Q1 2018 Update

Aon ILS IndicesThe Aon ILS Indices are calculated by Bloomberg using month-

end price data and index membership provided by Aon Securities

Inc., the administrator of the indices.

On a quarterly basis, the All Bond and U.S. Hurricane indices

posted returns of 1.45 percent and -1.17 percent respectively.

The negative return for the U.S. Hurricane index during the

period was due to an increase in losses from Hurricane Irma for

one of the bonds in the market. The All Bond index outperformed

all comparable benchmarks for the quarter, as all benchmarks

suffered negative returns.

Aon ILS Indices returned positive results during the 12 months

ending March 31, 2018 despite significant natural catastrophic

activity. The Aon All Bond and U.S. Hurricane Bond indices

produced gains of 1.81 percent and 1.56 percent respectively.

The Aon All Bond Index underperformed relative to comparable

BB U.S. High Yield and the S&P 500 indices, but outperformed

U.S. Treasury Notes, ABS and CMBS indices. The highest return

came from equities, as the S&P 500 Index returned 11.77 percent

during the annual period ending March 31, 2018.

Figure 3: Comparative Indices and Benchmarking

Index Title Return for Quarterly Period Ended March 31 Return for Annual Period Ended March 31

Aon ILS Indices 2018 2017 2018 2017

All Bond Bloomberg Ticker (AONCILS) 1.45% 1.03% 1.81% 6.21%

U.S. Hurricane Bond (AONCUSHU) -1.17% 0.65% 1.56% 6.97%

Benchmarks

3-5 Year U.S. Treasury Notes (BEUSG2) -0.74% 0.58% -0.34% -0.63%

3-5 Year BB U.S. High Yield (J2A1) -0.79% 1.26% 2.57% 9.94%

S&P 500 (SPX) -1.22% 5.53% 11.77% 14.71%

ABS 3-5 Year, Fixed Rate (R2A0) -0.42% 1.22% 1.78% 2.68%

CMBS 3-5 Year, Fixed Rate (CMB2) -0.78% 0.67% 0.70% 1.34%

3 The 3-5 Year U.S. Treasury Note index is calculated by Bloomberg and simulates the performance of U.S. Treasury notes with maturities ranging from three to five years.

The 3-5 Year BB U.S. High Yield index is calculated by ICE Data Indices, LLC (IDI), and tracks the performance of U.S. dollar denominated corporate bonds with a remaining term to final maturity ranging from three to five years and are rated BB1 through BB3. Qualifying securities must have a rating of BB1 through BB3, a remaining term to final maturity ranging from three to five years, fixed coupon schedule and a minimum amount outstanding of $100 million. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transactions from a fixed to a floating rate security.

The S&P 500 is Standard & Poor’s broad-based equity index representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price performance only, and does not include dividend reinvest-ments or advisory and trading costs. The ABS 3-5 Year, Fixed Rate index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate asset backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one year remaining term to final stated maturity, a fixed coupon schedule and an original deal size for the collateral group of at least $250 million.

The ABS 3-5 Year, Fixed Rate Index is calculated by IDI and tracks the performance of U.S. dollar denominated investment grade fixed rate asset backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one year remaining term to final stated maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million.

The CMBS 3-5 Year, Fixed Rate index is calculated by IDI and tracks the performance of U.S. dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, at least one year remaining term to final maturity, a fixed coupon schedule and an original deal size for the collateral group of at least $250 million.

The performance of an index will vary based on the characteristics of, and risks inherent in, each of the various securities that comprise the index. As such, the relative performance of an index is likely to vary, often substantially, over time. Investors cannot invest directly in indices.

While the information in this document has been compiled from sources believed to be reliable, Aon Securities has made no attempts to verify the information or sources. This information is made available “as is” and Aon Securities makes no representation or warranty as to the accuracy, completeness, timeliness or sufficiency of such information, and as such the information should not be relied upon in making any business, investment or other decisions. Aon Securities undertakes no obligation to update or revise the information based on changes, new developments or otherwise, nor any obligation to correct any errors or inaccuracies in the information. Past performance is no guarantee of future results. This document is not and shall not be construed as (i) an offer to sell or a solicitation of an offer to buy any security or any other financial product or asset, or (ii) a statement of fact, advice or opinion by Aon Securities.

Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) are not affiliated with Aon Securities Inc. or its affiliates and do not approve, endorse, review, or recommend Aon ILS Indices or any financial products based thereon. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Aon ILS Indices.

Past performance is no guarantee of future results.

ContactPaul SchultzChief Executive Officer, Aon Securities Inc.+1.312.381.5256paul.schultz@aonbenfield.com

Aon Benfield, a division of Aon plc (NYSE: AON), is the world‘s

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please visit aonbenfield.com.

About Aon Benfield

Aon Securities Inc. and Aon Securities Limited (collectively, “Aon Securities”) provide insurance and reinsurance clients with a full suite of insurance-linked securities products, including catastrophe bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties, and derivative products.

As one of the most experienced investment banking firms in this market, Aon Securities offers expert underwriting and placement of new debt and equity issues, financial and strategic advisory services, as well as a leading secondary trading desk. Aon Securities’ integration with Aon Benfield’s reinsurance operation expands its capability to provide distinctive analytics, modeling, rating agency, and other consultative services.

Aon Benfield Inc., Aon Securities Inc. and Aon Securities Limited are all wholly-owned subsidiaries of Aon plc. Securities advice, products and services described within this report are offered solely through Aon Securities Inc. and/or Aon Securities Limited.

About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

© Aon plc 2018. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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